Running a Business While Working Full-Time: Tax Tips to Know

Balancing a full-time job with running a side business is becoming increasingly common as individuals seek additional income or pursue their passions. This dual role presents unique challenges, particularly in managing taxes. Understanding the tax implications of combining earnings can significantly impact your financial outcomes.

Combining Full-Time Earnings and Side Income

Managing income from both a full-time job and a side business requires careful tax planning. The IRS treats income from your side business as self-employment income, which is subject to different tax rules than your regular salary. While employers withhold taxes from your paycheck, you are responsible for setting aside funds to cover taxes on your side income.

Your total income, including salary and side business profits, determines your tax bracket, which can range from 10% to 37% as of 2024. A higher combined income may push you into a higher bracket, increasing your tax liability. In addition, the 15.3% self-employment tax (covering Social Security and Medicare) applies to net earnings from self-employment and is paid on top of your regular income tax.

Strategic financial planning helps manage these tax burdens. Contributing to a retirement plan like a Solo 401(k) or SEP IRA can lower your taxable income while supporting long-term savings goals. Additionally, understanding thresholds for tax credits and deductions, such as the Earned Income Tax Credit or Child Tax Credit, can further optimize your tax situation.

Paying Self-Employment Tax

Self-employment tax is a key consideration when running a side business. Covering Social Security and Medicare contributions, this tax is shouldered entirely by self-employed individuals. As of 2024, the rate is 15.3% on net earnings.

The IRS allows you to deduct the employer-equivalent portion of the self-employment tax as an adjustment to income on your Form 1040, reducing your overall taxable income.

For 2024, the Social Security portion of this tax applies only to the first $160,200 of combined wages, tips, and net earnings. Earnings above this threshold are exempt from the 12.4% Social Security tax, though the 2.9% Medicare tax continues without a cap. If your net earnings exceed $200,000 ($250,000 for married couples filing jointly), an additional 0.9% Medicare surtax applies.

Deductible Costs for Your Venture

Deducting business expenses is a critical strategy for reducing taxable income. The IRS permits deductions for expenses that are ordinary and necessary for your business. For instance, a freelance graphic designer can deduct costs for design software subscriptions or advertising.

Maintaining thorough records is essential to substantiate these deductions. Receipts, invoices, and other documentation must be retained. If you work from home, the home office deduction can be significant. You can deduct a portion of home expenses such as utilities and mortgage interest, based on the percentage of your home used exclusively for business. Alternatively, the simplified option allows a deduction of $5 per square foot of home office space, up to 300 square feet.

Business travel-related expenses, including transportation, lodging, and meals, are also deductible if they directly relate to your business. For 2024, the standard mileage rate is 65.5 cents per mile, which can be used to calculate deductions for business-related vehicle use.

Handling Estimated Payments

Managing estimated tax payments is crucial when you have self-employment income. The IRS requires quarterly payments if you expect to owe $1,000 or more in taxes. These payments are calculated using IRS Form 1040-ES, based on your projected income, deductions, and credits for the year.

Accurate projections of your business income and expenses are vital, as these can vary. Accounting software or consultations with a tax professional can improve precision and help track trends. In addition to federal taxes, state taxes may also apply, depending on your location. Each state has its own rules and deadlines, so staying informed is critical.

Organizing Financial Records

Keeping organized financial records is essential for managing both a full-time job and a side business. Effective record-keeping ensures compliance with tax laws and provides a clear view of your business’s financial health.

Separating personal and business finances is a key first step. A dedicated business bank account and credit card make it easier to track transactions. Accounting software like QuickBooks or Wave can automate tasks, categorize expenses, and generate reports for tax preparation and business planning.

Retain documentation for all deductible expenses, including receipts and invoices, for at least three years. Records related to asset purchases or depreciation may need to be kept longer. Digital storage solutions, such as cloud platforms, can simplify this process by securely storing scanned documents. Regularly reconciling records with bank statements ensures accuracy and prevents errors that could complicate tax filings.